Lawsuits from investors arguing that state policies have hit the value of their investments are already big business: they are worth billions around the world.

So-called Investor State Dispute Settlement (ISDS) policies – which allow international investors to sue over policies that harm their profits, if they meet certain criteria – gained notoriety when their attempted inclusion in the now defunct Transatlantic Trade and Investment Partnership (TTIP) deal provoked a massive backlash. More than 3 million people signed a petition against the deal.

Now Brexit may be shaping up to be another flashpoint in the fight against these lawsuits and the international treaties which enable them.

Although TTIP is now dead, Investor State Dispute Settlement clauses are already contained in a number of other treaties. The UK is signed up to 12 bilateral investment treaties with other EU states which allow investors to sue.

The UK, along with all other EU countries, is also signed up to the little known Energy Charter Treaty, which has proven a popular route for these legal cases. Covering 48 countries in total, it enables energy companies to sue – for example, where countries decide to ban new oil wells.

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In Italy, which has now left the treaty but is still liable for claims from when it was a member, UK-based fossil fuel company Rockhopper is suing for $40-50m sunk costs and $200-300m lost profits after the country banned new oil and gas operations near country’s coast.

The treaty has also been used in Spain over cuts to solar subsidies although, according to campaigner Cecilia Olivet of the Transnational Institute, of the cases she analyzed the majority were speculative cases by investors hoping to take advantage of the legal opportunity, rather than being genuine renewable companies. The UK is already the fourth biggest source of lawsuits through the Energy Charter Treaty, after the Netherlands, Germany, and Luxembourg.

Legal cases by displeased investors are already lucrative for the UK’s legal industry. But Brexit may mean not only a shake-up for the international ISDS system, it could also lead to the UK being on the receiving end of these shakedown demands.

Sued for Brexiting

Experts say that Britain is almost certain to face cases from unhappy investors once it has left the European Union.

‘Every law firm has been approached by firms looking for what their options are,’ says Iaonnis Glinavos, Senior Lecturer in Law at University of Westminster.

Although there is no guarantee any will succeed, how the UK government – currently floundering in negotiations – plays its hand will be crucial.

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Holger Hestermeyer, Reader in International Dispute Resolution at King’s College London, says one area where legal cases could succeed is if the UK does not safeguard EU trademarks or protected ‘Geographical Indications’ – which ensure products such as Parmesan or Champagne come from those regions.

Trademarks are considered property, and if the UK government did not take steps to ensure these continued to be protected after Brexit this would be considered ‘expropriation’ under ISDS clauses.

Glinavos believes some banks which had set up in the UK specifically to take advantage of access to the European financial services market might succeed in investor-state tribunals – as UK-based banks are set to lose access to this market and could argue that this violated their ‘legitimate expectations’.

However, only investors from countries which have signed a bilateral investment treaty with the UK (it currently has 94 in force) or another treaty which contains ISDS clauses, such as the Energy Charter Treaty, will be able to take legal action.

‘I would think we are probably talking about claims that run to hundreds of millions,’ says Glinavos. ‘It increases the cost [of Brexit] – for me this is the thing.’

‘If you have to compensate every investor for losses for Brexit, we would potentially be talking about enormous sums of money’

Specific guarantees made to investors – such as the secret letters sent to car manufacturers Toyota and Nissan to encourage them to stay in the UK – will also increase the risk of successful lawsuits.

‘It’s not a major concern if they don’t make mistakes but I’m not convinced they are not making mistakes… So far it doesn’t seem like the government has considered this as a relevant factor,’ says Hestermeyer.

Overall though, he is not sure many cases will succeed. Any that do so, Hestermeyer says, are likely to do so on the grounds of policies within the UK’s unilateral control – such as its failure to pass laws protecting trademarks – rather than due to Brexit per se or the UK governments’ failure to agree a beneficial partnership agreement with the EU.

He warns however that due to the way international treaty arbitration the possibility that the government will lose some cases cannot be ruled out.

‘I think we are talking about a much more limited scenario here. But if you would have to compensate every investor for losses for Brexit, we would potentially be talking about enormous sums of money’, says Hestermeyer. ‘In fact we would probably talking about the destruction of the investment protection system because that would end up with such unrealistic numbers and such a politically explosive message that I don’t see how that would work.’

A new ISDS hub

The risk is not just to the UK however.

Recently the European Commission has begun taking action against bilateral treaties between individual EU countries (as well as proposing reforms to the arbitration process) and a recent case at the European Court of Justice (ECJ) ruled that these treaties, which allow intra-EU investors to sue, are incompatible with EU law.

The European Commission is now pushing for these treaties to be cancelled.

Even it does cancel these bilateral treaties, the UK will still be part of the Energy Charter Treaty, and as the country will no-longer be bound by the ECJ’s ruling, investors may decide to use the UK to make use of ISDS provisions – and of the UK’s well developed legal sector which is already familiar with the European context.

‘To some degree we have already become quite a hub for ISDS cases,’ says Jean Blaylock, Senior Trade Campaigner at War on Want. Brexit is likely to see this trend continue and may also make it harder for the EU to crackdown on investor-state dispute clauses.

The UK has already made hints about cutting its corporate tax regime after Brexit and ISDS could be another way Britain outside the UK could play a role undercutting regulations and protections in Europe and elsewhere.

Jean Blaylock, Senior Trade Campaigner at War on Want, says this is yet another sign that treaties enabling investors to sue states should be cancelled as soon as possible.

‘ISDS is one of the most egregious things within trade deals; most members of the public don’t believe that these could exist,’ she says. ‘From our point of view the way out is to get rid of ISDS. When there is conflict and damage they exist to exacerbate that. They don’t serve their alleged purpose of encouraging investment… they don’t serve a constructive purpose, only a destructive one and we should get rid of them’.

On the other hand, with a more progressive government in power Brexit might serve as an opportunity for a new trade policy to take a strong stance against ISDS. ‘It could be a clear part of a modern [post-Brexit] trade policy. It should not embark on negotiations about trade deals that include ISDS and this should be a clear red line from the start’.

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